Despite an up day for stocks on Wednesday, markets remain under intense pressure.

The recent drop in oil prices might help ease investors' pain a bit. But the credit crisis looms large over the broader market. And inflation remains a concern. The Producer Price Index came out earlier this week showing an annualized increase of 12%. That's ridiculously high. So we're facing a double-edged sword: a slowing economy caused by a de-leveraging in banking and rising inflation across many different fronts.

Enough with the bad news. For a defensive investor, there are some opportunities worth noting. In the last column, we looked at health care. (See story here.) But there's another rather boring area of the exchange-traded funds marketplace that appears to be well-positioned to outperform.

The 'smart money' is moving into plays such as the Consumer Staples Select Sector SPDR (AMEX: XLP). Its top three holdings are Procter & Gamble (15.5%), Wal-Mart (10.9%) and Philip Morris (8.7%). So some 35.1% of the ETF's index comprises those names. Then, add three more—CVS, Coca-Cola and Pepsi—and half of XLP's total is in six names.

Is that bad to be so concentrated? In this market, that can actually be a real positive. These are mainly huge multinational conglomerates that should be able to weather most any economic storm. The old adage rings true with XLP—when you've got a tough economy, people tend to eat, drink and smoke more.

Even More Attributes...

Those are some of the fundamental reasons behind investing in XLP. But there are good technical reasons as well.

The ETF is down around 0.20% so far in 2008. Compared with the SPDR's (AMEX: SPY) better-than-12% drop, that's pretty good.

From a charting perspective, XLP staged a breakout from a quadruple top when it cleared resistance at $28.67 per share last week. It dropped like the market this week, but not nearly as much. Through Wednesday, its price had fallen 1.7% vs. SPY's 2% on the week.

XLP has fairly decent support at its 50-day moving average of $27 per share. We've seen an uptrend since July 1. Combined with the fact that it has remained well above its 50-day moving average, this ETF holds a very favorable reward-risk profile.

Some analysts are favoring consumer staples as a sector due to the U.S. dollar's rise. They point to a strengthening greenback as support. But that may or may not be correct. Sure, these are large multinationals. A rising dollar does make it cheaper for Wal-Mart, for example, to import goods to sell over here.

On the other hand, they'll sell less overseas because a rising dollar makes goods made in the U.S. more expensive.

Back To Basics

In the end, more people will shop at Wal-Mart due to a poor economy. The argument for consumer staples, at least in our mind, comes down to basic supply-and-demand characteristics rather than currencies.

The bottom line is that outside of defensive sectors right now, we remain very cautious. Speculating in currencies seems a little early. From July 15, we've seen a nice uptrend in PowerShares DB U.S. Dollar Index Bullish (AMEX: UUP). It broke out on Aug. 7 when it cleared resistance at $23.07. At the same time, it also broke through its 200-day moving average.

In the next several days, we saw extremely high volume. And that indicates institutional investors are coming into the market and making a play on the dollar. As a result, UUP gapped up on Aug. 8. That served as confirmation of the previous day's breakout.

But it's still a little early to signal all is clear with the ETF. Even though it came off a five-month base—which is usually a strong buy signal—there's a lot of resistance ahead. It closed at $23.82 on Wednesday. At $24 per share, UUP seems to face more headwinds.

The previous six months, UUP traded in a range of $23-$24 a share. If it can break above that range, we'd be a lot more positive on jumping into UUP.

Until then, it's a case of buyer beware. Sometimes, it's the second mouse that gets the cheese rather than the first. The dollar has been on a multiyear bear run. So if it's really staging a new bull market, there should be plenty of time to make money on the upside.

Jerry Slusiewicz is president of Pacific Financial Planners in Newport Beach, Calif., and his columns appear regularly on IndexUniverse.com. He can be reached at: jerry@pfpinvest.com.